A mutual fund is a type of investment that is made up of a pool of money collected from many investors used to purchase a portfolio of securities. Mutual Funds are a practical and efficient way of building a diversified portfolio including bonds, stocks, money market instruments, and other similar assets types.
When investing in mutual funds, your money is pooled with the investments of a variety of people. Professional investment portfolio managers then use these pooled investments to buy securities like stocks and bonds on behalf of the group of contributors. The portfolio manager is usually attempting to outperform benchmarks like the S&P 500, or other commonly followed indexes and are paid by investors based upon the expense ratio of the fund.
Investors commonly invest in mutual funds because of the low fund investment minimum and a diversified portfolio. In a mutual fund, your money is spread out among different securities in order to reduce risk. If you were creating your own portfolio, this level of diversification would require a significant initial investment, but with a mutual fund, you can take advantage of economies of scale.
There are also many different types of mutual funds including equity, fixed income, money market, balanced, index, sector/specialty, and fund-of-funds. Each individual fund has its own unique investment objective and associated risk. These investment objectives vary from lower risk investments like commercial paper or treasury bills in a money market fund to various types of bonds in income-producing funds to equity funds, which have an objective of capital appreciation and invest in stocks. It is important that investors read the fund prospectus, statement of additional information and other fund documents to understand the specific attributes of each fund.
Investors are encouraged to do adequate research or contact a broker/financial advisor, attorney or CPA, to determine if mutual funds are an appropriate investment. Once you have determined that a mutual fund is suitable for you, it can be purchased with your Self-Directed IRA or other retirement accounts at Mainstar Trust. Click here to find out how to use a Mainstar Trust account to invest in a mutual fund.